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Institutions, Informal Economy and Economic Development

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  • Ceyhun Elgin
  • Oguz Oztunali

Abstract

Using cross-national panel data, we examine the evolution of the informal economy through the course of economic development. Borrowing from previously published informal economy estimates for 141 countries over the period 1984-2009 and using panel data estimation techniques, we investigate the relationship between informal economy and the level of economic development, proxied by gross domestic product (GDP) per capita. Our findings suggest that institutional quality strongly interacts with this relationship. Specifically, we find that a higher GDP per capita is associated with a larger informal sector size in countries where the institutional quality is low. The opposite is true in countries with good institutions. These results are also in line with a two-sector dynamic general equilibrium model.
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Suggested Citation

  • Ceyhun Elgin & Oguz Oztunali, 2013. "Institutions, Informal Economy and Economic Development," Working Papers 2013/03, Bogazici University, Department of Economics.
  • Handle: RePEc:bou:wpaper:2013/03
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    References listed on IDEAS

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    Cited by:

    1. Hermann Ndoya hegueu & Aristophane Djeufack dongmo, 2021. "Urbanization, Governance and Informal Economy: an African Tale," Economics Bulletin, AccessEcon, vol. 41(3), pages 1525-1540.
    2. Michael Effah Asamoah & Imhotep Paul Alagidede & Frank Adu, 2021. "Private Capital Flows, Real Sector Growth and Institutional Quality in Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 33(1), pages 171-207, January.
    3. Afonso, Oscar & Neves, Pedro Cunha & Pinto, Tiago, 2020. "The non-observed economy and economic growth: A meta-analysis," Economic Systems, Elsevier, vol. 44(1).
    4. Gheorghe ZAMAN & Zizi GOSCHIN, 2016. "A New Multidimensional Ranking of Shadow Economy for EU Countries," Romanian Journal of Economics, Institute of National Economy, vol. 43(2(52)), pages 14-33, december.
    5. Pablo Duarte, 2017. "The relationship between GDP and the size of the informal economy: empirical evidence for Spain," Empirical Economics, Springer, vol. 52(4), pages 1409-1421, June.
    6. Liu, Ailan & Wang, Zhixuan & Zhu, Pengcheng, 2021. "Does informal economy undermine the effects of China’s aid on its outward foreign direct investment?," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 315-329.
    7. Ceyhun Elgin, 2020. "Shadow Economies Around the World: Evidence from Metropolitan Areas," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 46(2), pages 301-322, April.
    8. Alan Finkelstein Shapiro, 2015. "Institutions, Informal Labor Markets, and Business Cycle Volatility," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2015), pages 77-112, October.
    9. Boza, S. & Mora, M. & Osorio, F. & Munoz, J., 2018. "Family farmer attitudes toward incorporating into the formal economy," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 276960, International Association of Agricultural Economists.

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